Industry reaction: Plummeting pound a shining light for overseas investors?

As the economic crisis continues to loom over the UK in the nascent days of Liz Truss’ Premiership, fears abound. Sterling has crashed, akin to a niche cryptocurrency, with a record low against the dollar of $1.035 earlier this week. And Chancellor Kwasi Kwarteng’s mini-budget has been slammed as reckless, as he slashed the top tax rate from 45p to 40p, drawing ire from economic experts. The top rate cut, along with a reduction in base tax rate from 20p to 19p, should amount to £45bn-worth of tax cuts in a huge wave of borrowing. The International Monetary Fund (IMF) hit out at the government’s strategy, arguing it would lead to further inequality in the country. Coupled with rising inflation and the cost-of-living crisis continuing to mount, the IMF stepped in to voice its concerns and noted it was “closely monitoring recent economic developments in the UK”. An IMF spokesperson said: “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.” Elsewhere, Moody’s said the UK’s upcoming tax cuts could permanently impact the economy if they were not shelved. The ratings agency said: “A sustained confidence shock arising from market concerns over the credibility of the government’s fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK’s debt affordability.” And with the population staring down the barrel of a barren winter, the gambling industry is also set to be impacted on the public markets. The seemingly constant roll of M&A could be the first thing to fall victim to the macroeconomic environment, according to one equity analyst at a London-based investment bank. Speaking to EGR, the source said that M&A funding through debit and equity is becoming increasingly harder, and that unless there were any glaring strategic synergies to be gained, public market mergers could be off the table for a while. Northridge Law’s Mike Herbert added: “The wider economic uncertainty and tight debt markets are acting as a break on M&A activity across all sectors and this will need to be eased before we see a return to the levels of deal activity that we witnessed in the sector during 2021.” However, there is of course the opportunity for overseas investors and operators to take advantage of the weak sterling. For example, DraftKings proposed a $22.4bn takeover of Entain last year, yet the London-listed firm’s market cap today in dollars stands at $7.2bn. This could prompt MGM Resorts into making another bid for Entain – its JV partner in the US – after the casino giant’s £8.1bn offer was rejected in early 2021. RB Capital’s Julian Buhagiar said it was a “great time to buy a GBP-denominated business” as the dollar continues to strengthen. The unnamed equity analyst added that investors were clearly going to be looking at US dollar-reporting companies but warned that they would also be avoiding indebted companies with floating debt. Herbert concurred, adding that UK gambling assets could be in the crosshairs of investors readying to strike. He said: “The devaluation of the pound presents an opportunity for overseas investors – especially those based in the US – to take advantage of increasingly attractive valuations for UK gambling assets. This could result in opportunistic approaches by well-capitalised investors.” Today, the Bank of England has confirmed it will intervene in the bond markets in an attempt to stabilise the economy, and will begin buying long-dated gilts (government-issued bonds) from today until 14 October. In a statement, the Bank of England said: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy. “In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”